Be Legal: Startups Guide to avoid Legal Troubles

The Dreamland of Startups

The world of startups make for an exciting and attractive work environment, well, almost. Whether it’s a new invention/innovation or a revolutionary solution to an existing problem of society, work can get pretty intense at a startup.

It’s easy to overlook a lot of the “legal stuff” which can hurt in unforeseeable ways immediately after you have done your company registration. In this piece, we are going to look at how startups can avoid “being served” by staying on the right side of the law.

The Right Side of the law

Startups, as we said before, can be a place of high intensity. Startup owners thus, have to vary of situations escalating and problems with the law. Let’s look at some of the things a newly formed startup owner should consider for avoiding the scrutiny of the law.

Business Structure: What type of Company should I form?

One of the basic foundations of a successful startup is defining the basic structure of your startup. By structure, we mean what type of company you are incorporating. This defines the direction your startup is going to take in the years to come. Things to consider while deciding Company structure:

1. Do you want to invite investments?
2. Do you want to go public or not?
3. What are the responsibilities and liabilities of Directors / Partners / Shareholders?

Startup owners should take a long and hard look at the structure of the company and their regulations to avoid any issue of non-compliance.

Business Compliance: Is my Business Compliant?

There are many legal ramifications of starting a company and at first glance, they might look like formalities. However, a non-compliant business could incur heavy fines and penalties and worse yet, face the threat of closure. The government lays down the compliance requirements for various types of companies for a particular country. They also make various amends to existing laws so companies have to recalibrate their compliances frequently.

In India, the Ministry of Corporate Affairs (MCA) lays down the compliance requirements for companies. The compliances in India have to be filed with the Registrar of Companies (ROC). There are many services which help you file ROC compliances if ever startups feel like they would require professional assistance.

The NBFC Drama in India

In an attempt to stop non-compliant companies, the Reserve Bank of India (RBI) canceled the business license of over 100 NBFCs (Non-Banking Financial Companies) over the months of June and July of 2018. These cancellations came as a part of stricter compliance requirements of NBFCs in response to a negligent breach of regulations and violations of codes by the Sahara Financial Group in 2015. Thus, the compliance requirements are not a matter to be taken lightly by companies.

Conflicts and Lawsuits by Employees: Avoiding Legal Conflicts with Employees

We all understand how competitive and ruthless a startup environment can be. It is essential thus for owners to be very cautious about incidents of misconduct with or from employees. A rule of thumb for such events indicate generating and handing out employee handbooks to all new recruits. You can also ask for confirmation that employees received the handbooks and are aware of employee codes set by the said handbook. This is a great way to cover all aspects of lawful office conduct from sexual harassment policies to the legible office dress code.

Protection of Personal Assets: How to make sure nobody comes after my hard-earned money?

It’s often said not to mix business with pleasure. The same is true when it comes to personal assets and business assets. It is advisable to keep these assets separate. In the event of a creditor proceeding legally against you, they are eligible to seize your company’s assets if personal funds were used to make the purchase.

The Partnership Talk: How to structure the partnership agreement?

It’s always hard to decide who gets what part of the company, what is the value of their shares and what duties and obligations of each partner/director/shareholder is. However, once this part is done and dusted, it could help avoid all legal troubles in case of a falling out between partners or dissolving of the firm. Better safe than sorry. Right? A well-drafted partnership agreement is a strong step to let everyone know of their position at your company.

The Name Game: Is my Business name protected?

We’re sure it must be a hard time settling on the name of the business that you are so passionate about! It would be a shame to have settled on a name after hours of deliberation just to find out there are businesses with the same name. This exposes a company to a lot of legal procedures for a breach of trademark. It is advisable to either do a trademark search or do a trademark registration for your proposed name.

What if I get sued?

It’s rare to run a company without being subject to lawsuits. In the case of the company undergoing legal proceedings, it is advisable to keep a lawyer or a law firm in your retainer to help avoid or minimize damages to the firm. A company, however, should always look at settling cases without involving the court of law or lawyers.

Non-Disclosures: Should you use them?

Companies often tend to reveal information related to the company to other companies in the hopes of creating a joint venture. Startups should look at creating well-documented Non-Disclosure Agreements (NDA) to protect the interests of the company. This might result in losing valuable work to a competitor and could also harm the reputation of the company in the long run.

Word of Mouth: Are Oral Contracts enforceable?

Contrary to popular belief, Oral Contracts could be enforceable under certain conditions. The Indian Contract Act, 1872, stipulates that an oral contract can be deemed valid binding on the parties which entered into it if enforcing evidence is available. It is vital for companies to see and keep evidence for enforcing said oral contract. It could be by means of a call, a personal interaction or through a written message format.

Lawyer Up: Do I need an attorney for the company?

Many a time, a legal issue might seem trivial and a non-factor to the company but it could cause unforeseeable damages to the firm and could hurt both financially as well as reputation-wise. Therefore, it is a healthy practice to keep the services of a lawyer/law firm at your disposal to deal with such issues.

Conclusion

Winding up, we would like to add that it is not “fun” for any company owner to deal with legalities and complete formalities like compliances and worry about code violations while you are neck-deep into work. However, in order to continue smooth day-to-day operations and ensure a long and healthy future of the company it is important not to fall at odds with the law. Startup owners need to take care of every little aspect of their brilliant startup idea and ensure they protect, foster and grow it well and legally.